MYLAN - EXHIBIT 1065
`Mylan et al. v. AstraZeneca
`IPR2015-01340
`
`

`
`National Economic Research Associates, Inc.
`so Main Street, 14th Floor
`White Plains, NY 10606
`www.nera.com
`
`Copyright @2005 by
`National Economic Research Associates, Inc.
`All rights reserved. Published in 2005.
`
`Except as permitted under the United States Copyright Act
`of 1976, no part of this publication may be reproduced or
`distributed in any form or by any means, electronic or
`mechanical, without the written permission of National
`Economic Research Associates, Inc.
`
`Printed in the United States of America.
`
`Leonard, Gregory K., 1963-
`Stiroh, Lauren J., 1968-
`
`Economic Approaches to Intellectual Property Policy,
`Litigation, and Management;
`edited by Dr. Gregory K. Leonard and Dr. Lauren J. Stiroh,
`
`with a foreword by Dr. Victor P. Goldberg.
`Includes index.
`
`ISBN 0-9748788—1—2(pb)
`
`1. Economic Approaches-—Intellectual Property 2. Policy
`3. Litigation 4. Portfolio Management
`I. Title
`
`Library of Congress Control Number: 2005930350
`
`Contents
`
`Foreword, Victor P. Goldberg - ix
`
`Preface - xi
`
`Acknowledgments - xv
`
`I. A Survey of Economic Knowledge Regarding
`Intellectual Property
`
`1. Uncertainty in the Economics of Knowledge and Information,
`Lauren]. Stiroh - 3
`
`2. The Economics of Patent Policy: A Review of Recent
`
`Empirical Studies, John H. Johnson - 13
`
`II. The Basics of Intellectual Property Damages
`
`A Practical Guide to Damages, Gregory K. Leonard and
`
`Lauren J. Stiroh - 2 7
`
`The Evolution of the Courts’ Thinking on Damages,
`
`Phillip A. Beutel and Bryan Ray - 6 9
`
`A Critique of Noneconomic Methods of Reasonable Royalty
`Calculation, Christine Meyer and Bryan Ray - 83
`
`Valuation of Nonpatent Intellectual Property: Common
`Themes and Notable Differences, Phillip A. Beutel - 9 5
`
`III. Advanced Topics in Economic Analysis in Intellectual
`Property Litigation and Damages
`
`7. Applying Merger Simulation Techniques to Estimate
`
`Lost Profits Damages in Intellectual Property Litigation,
`Gregory K. Leonard - 1 1 1
`
`

`
`LITIGATION, AND MANAGEMENT
`
`
`
`8. The Use of Surveys in Intellectual Property Disputes,
`Eugene P. Ericksen and Sarah M. Butler - 1 25
`
`9. Hedonic Characteristics in the Valuation of Intellectual
`
`Property, Joseph P. Cook - 1 4 1
`
`10. The Use of Event Studies in Intellectual Property Litigation,
`John H. Johnson and Vinita M. Juneja - 153
`
`11.
`
`Interest and Discount Rates in Intellectual Property Damages,
`Jesse David and Christine Meyer - 1 6 9
`
`12. Avoiding Misidentified Incremental Costs, Alyssa Lutz and
`Paola Maria Valenti - 1 85
`
`13. Commercial Success: Economic Principles Applied to Patent
`
`Litigation, Jesse David and Marion B. Stewart - 1 9 5
`
`14. Preliminary Injunction Motions and the Economics of
`
`Irreparable Harm in Pharmaceutical Patent Infringement Cases,
`Jason Zeitler - 2 o 9
`
`The Intersection of Antitrust and Intellectual Property
`
`15. Standard Setting and Market Power, Richard T. Rapp and
`Lauren]. Stiroh - 2 23
`
`16. Essential Issues in the Competitive Analysis of Patent Pools,
`
`Lawrence Wu and Thomas R. McCarthy - 2 3 3
`
`17. Antitrust Implications of Pharmaceutical Patent Litigation
`
`Settlements, Gregory K. Leonard and Rilza Onishi Mortimer - 2 51
`
`18. A Comparison of Market Tests for Evaluating Patent Damages
`Claims and Antitrust Counterclaims, Joseph P. Cook, Susan C.S.
`Lee, and Ramsey Shehadeh - 2 6 7
`
`Intellectual Property Rights Protection in
`Japan and China
`
`19. When East Meets West, Christian Dippon and
`Norileo Kakihara - 2 7 7
`
`20. Intellectual Property Rights Protection in China: Litigation,
`
`Economic Damages, and Case Strategies, Alan Cox and
`
`Kristina Sepetys - 2 9 3
`
`VI. Issues in the Management of Intellectual
`Property Portfolios
`
`21. Using the Real Option Method to Value Intellectual Property,
`George G. Korenleo - 3 1 7
`
`22. Transfer Pricing Issues Affecting the Value of Intangible
`
`Property in Multinational Companies, George G. Korenlzo - 3 3 5
`
`23. Finding Patent Litigation Strategies That Make Economic
`
`Sense, Phillip A. Beutel - 3 59
`
`Contributors ' 3 6 9
`
`Index - 3 81
`
`vi
`
`vii
`
`

`
`LITIGATION, AND MANAGEMENT
`
`d f‘
`—
`'
`-
`.
`e 1111:‘: but £01‘ Scenario, an understanding of how incremental sales
`you I 3V: hanged the plaintiff s cost structure, and the market condi-
`1
`'
`-
`.
`.
`,
`ons in w 1c
`the plaintiff would have produced these umts. Fmanclal
`documents and data can form the basis of this analysis but an under
`standing of the data and underlying accounting methods is necessary to
`complete an accurate incremental cost analysis.
`
`13
`
`Commercial Success:
`Economic Principles Applied
`to Patent Litigation
`
`Jesse David and Marion B. Stewart
`
`A party accused of infringing a patent may contend that the asserted
`
`is invalid because of obviousness. That contention may be
`patent
`rebutted by a showing that the patented invention is a commercial suc-
`
`cess——-one of several secondary considerations that courts look to for iden-
`
`tifying the differences between the patented invention and the prior art.
`These secondary considerations—known as objective indicia of nonobvi—
`
`ousness—also include such factors as copying, long—felt but unsolved
`need, failure of others, and licensing.‘1
`Determining whether an invention has, or has not, been a commercial
`
`success is primarily an economic exercise, and economists increasingly
`assist courts in evaluating this issue. Case law indicates that courts have
`
`traditionally looked for characteristics such as increasing revenues, gain
`
`in share in an appropriately defined market, and public acclaim in an
`
`attempt to determine whether a product has been a commercial success.
`
`Courts have also considered whether the patent holder has established a
`
`nexus between the claimed invention and the product’s commercial suc-
`cess—that is, whether the commercial success, if evident, is due to the
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`patented feature as opposed to some other characteristic of the product
`or a mode of selling employed by the manufacturer.
`
`1
`
`In re Denis Rouffet, Yannick Tanguy, and Frederic Berthault, 149 F.3d 1350, 47 USPQ2d
`1453 (Fed. Cir. 1998). It is our understanding that courts may consider all of these
`indicia in an assessment of a patent’s validity. For the purposes of our discussion, we
`consider only those factors that should weigh in a determination of commercial suc-
`cess, not whether or the extent to which those factors could support a finding of
`validity or invalidity.
`
`194
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`195
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`LITIGATION, AND MANAG’
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`"” 7ETTIGAWON"' "
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`From an economic perspective, commercial success could in principle
`be defined by a single criterion: Does the patented invention earn a pos-
`itive net return (risk—adjusted) ‘bn invested capital after accounting for all
`relevant costs associated with developing and commercializing the patent
`as well as any alternatives available to the patent holder? Patents exist to
`
`protect the human and financial investment used to develop new prod-
`ucts, services, or processes. This investment, however, is only beneficial,
`
`from a social perspective, if consumers are willing to purchase an embod-
`iment of the invention at such a price as to fully compensate the inventor
`for all costs incurred in bringing the product to market? Put simply,
`patents are not needed to protect inventors from making poor invest-
`ment decisions.
`
`The courts’ use of the previously mentioned factors is not necessarily
`in conflict with this definition, and many—perhaps most———previous deci-
`
`sions made by courts are likely to have been consistent with it. Given the
`
`limitations on available data, it is entirely reasonable that an analysis of
`
`commercial success should consider and place significant weight on the
`
`traditional measures such as market share or revenue growth. However,
`
`under certain circumstances, rapid sales growth and gains in market share
`
`will not necessarily reflect a profitable underlying invention. Moreover,
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`calculating the proper measure of profitability can be a complicated task
`
`and should be considered in an appropriate context—for example, relative
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`to an appropriate benchmark or alternative. Consequently, it is our opin-
`
`ion that courts should look more deeply into the economic characteristics
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`of the product before arriving at a determination of the commercial
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`success of the patent.
`
`A Summary of the Case Law
`
`In Graham v. John Deere Co., the seminal case identifying commercial suc-
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`cess as a relevant secondary consideration in a determination of patent
`
`validity, the Supreme Court of the United States cited an article in the
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`University ofPennsylvania Law Review that focused on the consumer per-
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`spective for evaluating the commercial success of a patent. The article
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`stated that “[t]he operative facts...are the actions of buyers rather than
`those of producers.”3 Case law since Graham has generally followed this
`
`3 One could imagine that, for reasons of public policy, a patented invention related to
`health care could be sold at an artificially low price, or even given away, but such a
`strategy would not reduce the true value of the invention.
`2::
`3 Graham v. John Deere Co., 383 U-S- 1 (1966); and Richard L. Robbins, “Subtests of
`‘Nonobviousness, University ofPennsylvania Law Review 112 (1963-1964): 1175.
`
`position. For example, in Demaco Corp. v. Fl. Von Langsdorff Licensing Ltd.,
`the court stated the following:
`
`The rationale for giving weight to the so-called “secondary consid-
`erations” is that they provide objective evidence of how the
`patented device is viewed in the marketplace, by those directly
`interested in the product.‘‘
`
`Based on this approach, courts appear to have turned to a few standard
`measures of consumers’ demand for the patented product, such as total
`unit sales or revenues. Although not universally, the courts have generally
`recognized that this information must be placed in a “meaningful context”
`and consequently have noted that the sales must represent a significant
`and/or growing share of that product in some “market.” This also follows
`the University of Pennsylvania Law Review article, which stated that “ftlhe
`basic measure of commercial success should be the proportion of the total
`market for the product that the patentee has obtained.”5 Subsequent deci—
`sions have reinforced the standard that sales figures must at least be con-
`sidered in light of the size of the overall market, although the method for
`identifying the appropriate market has not generally been specified.6
`However, achieving a significant volume of sales or even a large mar-
`ket share does not necessarily indicate that the inventor should view a
`patent as a success. For example, sales may be driven by characteristics
`other than the patented invention, such as other patented features, non-
`patented characteristics, and brand name. For some products, market
`share may also be affected by advertising. (The basic formulas for Coke
`and Pepsi haven’t changed in decades, yet market shares appear to be
`affected by changing marketing strategies on the part of the two compa-
`nies.) As an extreme example, increasing sales and market share of a
`product could also be generated by simply lowering price, a tactic some-
`times employed by companies seeking to create customer awareness early
`
`4 Demaco Corp. v. Fl. Von LangsdorffLicensing Ltd., 851 F.2d 1387, 7 USPQ2d 1222 (Fed.
`Cir. 1988).
`5 University of Pennsylvania Law Review, 1175.
`6 For example, see Ecolochem Inc. v. Southern California Edison Co., 227 F.3d 1361 (Fed. Cir.
`2000); Cable Electric Products Inc. v. Genmorla Inc., 770 F.2d 1015, 226 USPQ 881 (Fed.
`Cir. 1985); and Hybritech Inc. v. Monoclonal Antibodies Inc., 802 F.2d 1367, 231 USPQ 81
`(Fed. Cir. 1986). An exception where a decision considered sales explicitly outside the
`context of the size of the overall market is Neupalz Inc. v. Ideal Manufacturing and Sales
`Corp., 41 Fed. Appx. 435; 2002 U.S. App. LEXIS 13843 (Fed. Cir. 2002). In].T. Eaton and
`Co. v. Atlantic Paste and Glue Co., 106 F.3d 1563, 41 USPQ2d 1641 (Fed. Cir. 1997), the
`court similarly found that a large number of units sold did represent evidence of com-
`mercial success, without any showing of a share in a well-defined market.
`
`196
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`197
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`1.1 1 1\JI1'1‘I\JlV, AND MANAGEMENT
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`t,ultimate1Y aI1i“"e“t°r’S sucl
`cases.1° As these cases properly point Du
`that
`his investment relative to
`s should be judged by the returns to
`ces
`natives.
`'inventor’s next~best alter
`
`
`
`
`
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`in the product life cycle. The Manual of Patent Examining Procedure, pub-
`lished by the United States Patent and Trademark Office, identifies this
`
`nexus between the success of the product and the patent itself as a key
`component of a nonobviousness claim:
`
`An applicant who is asserting commercial success to support its
`contention of nonobviousness bears the burden of proof of estab-
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`Discussions of profitability or other “supply—side” considerations have
`been included in assessments of commercial success in only a few other
`
`7 United States Patent and Trademark Office, Manual of Patent Examining Procedure,
`February 2003 revision, § 716.03. See also Demaco, 851 F..2d 1387.
`8
`Although the courts have consistently recognized that the issueof a nexus is critical
`in a determination of commercial success, in many cases they have found that the
`existence of a significant advertising budget does not in itself rebut the presumption
`that the commercial success of the product at issue must be due to the patented
`invention. For example, see Merck and Co. v. Danbury Pharmacal Inc., 694 F.Supp. 1, 21
`(D. Del. 1988); and Hybritech, 802. F.2d 1367.
`9 Cable, 770 F.2d 1015.
`
`
`
`
`
`198
`
`199
`
`Economic Criteria
`’
`_
`.
`.
`111 the first edition of his grou
`'
`d Posner discussed the norfll
`.
`.
`-
`'
`'
`' h
`the distinguished llfflfit (lit gzscriptive) roles of econo
`mics in the law-
`prescriptive) and Posmve
`' "
`tool of normative analysis Of
`s turns out to be 3 Powerful
`Economic
`‘
`'
`'
`reform...Th€
`s—~a source of criticism am:
`1
`b bus
`law and legal institution
`'
`-
`-
`.
`air
`0 vi
`mic analysis in the law 18
`Y
`normative role of eCOD0
`.
`.
`d outcomes in
`1
`in the rules an
`.
`.
`_”
`that of exp am g
`t less -lmpor-
`The positive role
`_
`as they are——is less obvious, but I10
`th legal system
`h
`t
`-
`many areas of the law, especially t e Brea
`e
`tant. As We shalli see;
`arty torts and contracts, bear the stamp
`common law fie
`s o prop
`,
`,
`.
`_
`be sure Contain
`.
`-
`1
`lo inions to
`1
`of economic reasoniI1%- Few ega
`P
`’
`' dges have a
`.
`c concepts and few 111
`,
`.
`explicit references to economgnomics But the true grounds of
`substantial background indecther than illuminated by the Chara?
`.
`.
`a
`-
`11
`I .
`decision are often concea e
`.
`.
`-
`'
`'
`'alo inions.
`teristic rhetoric of Judlcl
`P
`' htforward norma-
`'
`t that there is a straig
`.
`AS descnbed above’ We iluécgersnhing commercial success: A Patented
`.
`1
`'
`‘
`e er
`tive role for econofmcs uld
`(1
`commercial success if it can be Shown
`-
`h 1d be consi ere
`a
`-
`earn, a positive net
`invention s 01:1
`I can reasonamy be expected to
`I16 , 0
`to have ear
`unfing for an relevant Costs assoc}
`.
`‘
`t
`acco
`.
`return on mvested Capltalcff eirrirnercialization as well as any alternatives
`-
`o
`ated with development an C
`borne by the Patent
`'
`.
`d the amount of risk
`.
`.
`available to the patent holdelciallo well in our view, to adopt more eXPhcit
`holder. Although courts Wolli
`lines in their analysis of commercial suc~
`.
`'
`6
`economic reasoning along '5 es
`that a substantial
`‘
`he relevant cases suggests
`ues, our reading of ‘E
`eady found its way into judicial opin-
`Cess iss
`unt of economic analysis has alr
`amo
`,
`.
`-
`' 1 success.
`long regal-‘dmg Commercla
`it appears that economic analysis could
`es
`-
`1
`»
`Under certain circumstanc
`.
`«
`atented invention
`.
`.
`-
`the question Has a P
`‘
`definitive answer to
`_
`brovlde ammercial success?” For example, S11PP°5e that
`
`.
`
`I1
`
`d
`
`‘
`
`een a co
`_—:j*’:
`
`WL 503432. (W. D. Pa.);
`_
`boratories Inc. v. Shandon Inc., 1992
`USPQ2
`10 For example, 569 Miles La
`d 685 (Fed. Cir. 1996)-
`1
`fie, Brown and Co.,
`and In re Ben Huang; 100 Féd/§1’:.1’l4sCi)s of Law (Boston, MA1 Lit
`11 Richard A. Posner, EC°“°””C
`y
`1972), 6-
`
`lishing a nexus between the claimed invention and evidence of
`commercial success.7
`
`Courts have recognized some of these possibilities and have generally
`
`required a showing that any commercial success be directly linked to
`demand for the patented feature rather than any other factors.
`
`Consequently, for any data on sales or market share to be relevant, one
`
`must be able to demonstrate that whatever demand for the product
`
`exists, it is due, at least in part, to the patent, not some other features or
`actions by the seller.8 A simple thought experiment can shed light on the
`concept of a nexus. Suppose the patented invention were made unavail-
`able and removed from the product. Could the seller attain the same level
`
`of commercial success? Or, from an economic perspective, what is the dif-
`
`ference in net profits that would accrue to the patent holder if the
`patented invention were removed from the product?
`
`Despite the courts’ tendency to view commercial success from only
`
`the consumers’ perspective, a few decisions have recognized profitability
`
`as a factor that might be considered along with other objective economic
`
`evidence. For example, in Cable Electric Products Inc. v. Genmork Inc., the
`court stated:
`
`Without further economic evidence, for example, it would be
`
`improper to infer that the reported sales represent a substantial
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`share of any definable market or whether the profitability per unit
`is anything out of the ordinary in the industry inVolved.9
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`ux r:\J‘1':.I. IKJIV, r$.rV'IJ IVI'£xN1{[;§;
`
`1VII:.N"l'
`~
`
`—
`
`1.
`
`-
`a start—up company found d
`invention, incurred costs (3: :1::e1:tt0 e1XPlO1'l'. a s)ingle patented
`_
`va ue ter
`f
`'
`-
`develiop a smgle saleable product;
`ms 0 $1 million to
`
`1
`
`-
`
`over its entire life cycle—now completed——sales of that Product
`O
`.
`generated net profits of $2 mil1'
`‘
`and
`1 n (again, in present value terms);
`there is no doubt that th3 Product characteristics and/or other
`factors that led consumers to u h
`the invention.
`p rc age the Product Were all due to
`
`'
`
`.
`
`of
`
`l
`
`.
`
`,
`
`The first assum 'ption allows us to say with
`certainty that it cost pl-e-
`Cisely $1 million to develo
`.
`.
`P 3 produ t
`'
`since we assume away any difficultiecs §1::3ody11ng the Patented invention,
`associate “common costs” in say a centfwlu d be caused by the need to
`(R&D) facility with the development of a pa‘Z re1search—and—development
`.
`_
`_
`r icu ar invention Th
`assumption eliminates the difficult
`.
`e Second
`'
`-
`to be earned by a product currentli: Uni‘: uatirig the Potential profits st111
`assures that the nexus between patentecs lhar et. The third assumption
`been established. Assuming that an apprognfffnrlon and sales suCC%ss has
`to “discount” (or a
`'
`.
`ma 6 Interest rate has been used
`ppreciate) the investment a d h
`million return on a $1 mi
`.
`_
`I1
`t e resultant profits a $2
`llion 1I1V€St1'l’l€IllC wo 1
`’
`-
`d surel
`merclauy successful Venture f
`u
`y count as a comt
`min the ers
`t‘
`(by assumption) the patented inventionlis Wpleact 1V€dOf
`tlhe producer. Since
`then the patented invemio
`ma e t at return possible
`n should be deemed a
`'
`’
`In our experience howeve
`'
`commercial success.
`1', the
`always more complicated than the stlslisuecls that need to be addressed are
`Surprise that——as far as we know 11:
`exiimple above’ so It 18 hardli’ <3
`e
`regarding the commercial success of a paffritretd i Casetllas reached a declslon
`-
`nv
`'
`mg the cost of developing and Selling the pape etrldion s:1rnPlY by COII1pa_1--
`earned On that product Our ow
`n 6 pm uct with Pr0fitS
`technology~oriented companies have teliiéiilulltesllsarglsadrf plea: thin even large,
`costs with What uhimatel
`003 1113 931 Y~stage R&D
`leading to some uncertainty regardirfoth :1‘C1allY viable product, inevitably
`invention to market.” In addition det e O~ta.1C0st of brlnging a patented
`product sold by a multiproduct conllbanernnnglgfProfitability for a single
`.
`can
`-
`.
`growth in that productrs Sales Comes at 1:'aSt pa ed urihclelr complicated if the
`1' Y a t e expense of profits
`
`.
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`.
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`.
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`.
`
`>
`
`2
`
`r
`
`—-
`
`-
`
`n res
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`ybecame a mm -
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`-
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`.
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`.
`
`12 Even if detailed
`_
`product—s
`'f‘
`_
`mlght be able to make a Ie1:;‘:‘:?3£8:l3af::Ei;l:t:fv:ere not available, however, one
`product S profits to the 3V€rage Cost of develo in Omdnerclal SuC.Ce.Ss_ by Comparing -3
`lar products.
`P 3 an Colnrnercializmg broadly simi-
`
`els
`
`armaceutical
`s of drugs,
`ue basis
`
`onal,
`
`if sales of the patented product
`ewhere in the company or, alternatively,
`s to other
`generate additional profits for the company by drawing consumer
`cts. Another complication arises from the fact that most patent dis-
`putes involve products currently or not yet on the market, not products
`produ
`whose life cycles have ended, adding further uncertainty regardingthe prof-
`13 And finally, while there are certainly
`its that will ultimately be generated.
`in which there is no doubt that the patented invention has created
`instances
`mance characteristics that were responsible for the product’s suc-
`the perfor
`ary examples in which it was clear
`ies have also revealed contr
`cess, our stud
`role in generating product sales. Given the
`that a patent played little, if any,
`“direct” measure of commercial
`ns that frequently make a
`data imperfectio
`g that courts have tended
`it is therefore not surprisin
`success impractical,”
`arket share. As Judge
`evidence, such as growth in m
`to focus on “indirect”
`ns on commercial
`r, many of the courts’ decisio
`Posner suggested, howeve
`he stamp of economic reasoning.”
`success nevertheless “bear t
`reasoning makes clear that ph
`For example, economic
`n research on a particular clas
`companies would not invest i
`elieved that on an expected—val
`such as antibiotics, unless they b
`ompanies’ expectations are rati
`that research would be profitable. If c
`ibiotics will generate enough prof-
`undle of “average” marketed ant
`then a 13
`table return on the companies’
`eir life cycles to yield an accep
`its over th
`much better than average is
`R8cD investments. A drug that clearly does
`5
`very likely, therefore, to be a commercial success}
`han average? A large
`How would we know that a drug is much better t
`likely indicator, and
`(i.e., much above—average) market share would be a
`duct is not too far
`rapid growth in market share——particularly if the pro
`e expected pres—
`into its life cycle——would also likely be relevant, since th
`sooner those
`ent value of a product’s profit stream will be greater the
`
`m._§___.__
`g.__.‘~._.._%b,§.._
`a blockbuster prescription drug that has performance
`13 Sometimes, however, as with
`features clearly due to the patent at issue, the sales and profits generated during the
`first few years of the product’s life will be sufficiently large to leave little doubt about
`the patent’s commercial success even if uncertainties remain regarding the precise
`magnitude of early— stage R&D costs.
`14 A further complication relates to the possibility that infringement by a competitor
`may affect the profitability of a patent holder’s product, and therefore its apparent
`In order for an analysis of profitability to be of use in assessing
`commercial success.
`commercial success, one should account for the actions of the infringer. Moreover,
`assessing only the infringer’s profitability, rather than the patent holder’s, may not
`provide an appropriate measure of commercial success. Such a problem could arise if,
`for example, the infringer had a different cost structure or sold to a different group of
`customers than the patent holder.
`ue. For example, in a highly prof-
`ial success.
`15 Note, however, that the inverse is not necessarily tr
`itable industry, a “below—aVerage” product may still be a commerc
`
`201
`
`

`
`LITIGATION, AND MANAGEMENT
`
`profits are earned.” The courts’ reliance on market—share data and
`growth in market share, as described in the previous section, appears to
`be sensible in light of the likely imperfections in the data that would have
`shed a more direct light on the issue of a product’s commercial success.
`
`Despite the fact that, for the most part, courts’ general approach to
`determining commercial success has been consistent with these eco-
`
`nomic concepts, it appears that some decisions would have benefited
`
`from more, or at least more explicit, economic analysis. For example, in
`
`the Neupale Inc. v. Ideal Manufacturing and Sales Corp. case, the court of
`appeals found the following:
`
`Because the record shows that between 1995 and 2000 Neupak’s
`
`patented mobile filling carts enjoyed a significant increase in sales
`
`and constituted an increasing share of Neupak’s business, the dis-
`
`trict court did not clearly err in concluding that Neupak demon-
`strated a nexus between commercial success and the ‘233 patent.”
`
`In this case, not only did the courts (both the district and appeals)
`
`apparently fail to put Neupak’s sales into any “meaningful context,” there
`
`appears to be a possibility that the product embodying the patented
`
`invention became successful at the expense of other Neupak products. It
`is likely that a relatively simple analysis of the company’s financial
`
`records could provide a definitive answer to that question.
`In another case, In re Ben Huang, the United States Court of Appeals
`
`upheld a finding by the Board of Patent Appeals and Interferences that the
`
`pending claims made by Huang for a patent covering a particular kind of
`
`tennis racket grip were obvious, in part through a finding that Huang had
`not presented sufficient evidence of commercial success.18 In this case, the
`patent holder had cited several factors that he claimed were indicators of
`
`commercial success, including 1) sales of over 1 million units for use on
`
`both new and resold rackets and 2) the fact that since Huang began selling
`
`the claimed grip, sales of his company’s prior grips had decreased by about
`
`50 percent. In this case, a relatively basic review of the economics of the
`
`claimed product by the patent holder would likely have provided a sounder
`
`basis for his claim. For example, from a review of the product and patent
`
`descriptions, it appears that development costs were likely quite low—the
`
`16 The discounted net present value (NPV) of a product that generates $10 per year in
`profits over the next three years will be greater than the NPV of a product that gener-
`ates $ 5 next year, $10 the second year, and $15 the third year, even though both prod-
`ucts will generate $3o in (undiscounted) profits.
`Neupalz, 41 Fed. Appx. 435.
`Huang, 100 F.3d 135.
`
`-
`'
`h
`t’
`fthe thickness of the various materi~
`Patent dalmield a C‘ha1i1fg t er1eatli)e(:ase then net profitability could have
`315 used in t e grlp
`1s We
`’
`'
`h
`duct and
`.
`-
`th th
`atented version of t 6 P170
`been rehably estlmated for be
`e P
`I-luang’s sales of the new
`d. Assuming that
`'
`'
`1
`the older version tha: it iepaceunting relative to the preexisting product
`-
`isco
`gnp were not afresul 0
`Sts for the two products were similar, then a
`and that manu acturmg C0
`b
`d ii an evalua-
`.
`.
`' lsuccess could be made ase 0
`I
`determination of cognmerciaes generated by the patented product relative
`.
`'
`venu
`tion of the increase re
`ark (Such as Huangs revenues prior to -mtmduc-
`m
`‘
`b
`h
`to an apllropriate enc
`fcompetimrs in the industry).
`1
`{on of the new product or to revenues o
`
`Two Case Studies
`on commercial success issues in
`We were asked to evaluate and testify
`n illustration of how traditi0D31
`two recent cases. These cases provide 21
`ove commercial success, 35 W911 as an
`measures may be insufficient to pr
`(1, economic analysis can P1'0Vide the
`illustration of how, if Properly apphe
`
`complete picture.
`3
`e we were asked to carry out research and testifY on
`In the first cas
`.
`.
`'
`th
`l'dity of a patent
`behalf of an accused infringer who was challenging
`(31:81 lmduct Despite
`allegedly covering a particular type of Packaged Snac P
`,'
`.
`rapid growth in sales of the product embodying the patented invengioi:
`_
`..
`-
`‘
`h f‘
`t
`rrisingtoaou
`(aPP1‘0X1matelV $30 mflhon m revenues .durmg t e Ksbyea t~ 1 share of am?
`$110 mflfion by the fourth year) and attainment of a su stan ia
`h 1
`.
`-
`-
`'
`1k
`f
`t that nonet e ess
`reasonably defined market, we identified severa
`ey ac S
`_
`_
`mmercial success.
`indicated that the patent m2\Y H0t have been a C0
`O f‘
`t
`cern was that although revenues were increasing rap'1dlY.
`ur irs con
`»
`.
`'
`'
`,
`h
`n in Figure 1, the com—
`,
`the trend in profits was not so promising As s ow
`I
`atel
`$10
`'
`d a cumulative net operating 1035 of approxlm y 1
`pany experience
`.
`’
`_
`_
`.
`.
`~
`-
`'
`f the roduct s life cyc e.
`mflhon to $15 million during the first five years 0
`P
`d_Of£ering
`Moreover the trend through the last two years was downwar
`f
`,
`’
`,
`-
`in the near
`ut111‘€-
`'
`no indication that profits would be forthcoming
`. Oming in
`Furthermore our analysis found that sales of the product were C
`,
`at were switching from other snack products man
`part, from customers th
`We estimated that an additional $13 3111;
`ufactured by the same company-
`“
`‘b 1'
`tion” of other pro UC
`_
`_
`.
`hon m profits had been lost due to lcfinmhatfeaproduct aPDarentlY had
`lines. These data mdlcated to us tlfit alt Chg consumers it did not appear
`s in the mar etp ace Y
`’
`bein deemed a Sl:1ClC:1s.'lCCeSS from the p€1'SP€CtiVe Of the Patent holder‘
`
`to e a commercla
`
`

`
`1.; 1 1un1'1\JN, Alva xvIANAGE1Vn:TNT'
`
`,. ,
`
`7 W
`
`"
`
`’ " "
`
`
`
`Figure 1. Snack Product Patent Holder Profitability,
`Annual and Cumulative
`
`10,000,000
`
`5,000,000
`
`1,
`Ia:
`
`Figure 2. Snack Product Annual Revenues Based 011 Number
`of Years Since Product Introduction
`
`I Competitor
`
`Patent Holder
`
`1 20,000,000
`
`100,000,000
`
`
`
`Revenues(Dollars)
`
`80,000,000
`
`60,000,000
`
`40,000,000
`
`20,000,000
`
`2nd Year
`
`The facts were very different in the second patent dispute in which we
`testified for the patent holder regarding the commercial success of an anti-
`infective drug. First, there did not appear to be much dispute about the
`nexus between the patented invention and the product’s efficacy, since-—aS
`one might expect with pharmaceutical products—the patent disclosed the
`drug itself and its methods of use. Second, although the accused infrmger
`contended that the product’s success was due to advertising and promo-
`tion, that argument was weakened by (1) physicians’ testimony ‘and other
`evidence that while promotional activities man’ We“ lead Physlclans to try
`a new product, repeated prescribing for patients is likely only if the prod-
`uct performs well; and (2) our analysis, which showed that the product at
`issue had the second—lowest ratio of promotional spending to sales Of 311
`major anti—infective products introduced in the past decade.
`.
`Traditional metrics, such as growth in market share, also pointed ‘to
`the product’s commercial success, as did a direct comparison of Pmflts
`and R&D expenditures. Figure 3, for example, shows that after Just four
`years on the market, the product ranked fourth among all oral tablet
`antibiotics, a market that included well over 2.00 products.
`
`0
`
`(5,000,000)
`
`(1 0,000,000)
`
`(15,000,000)
`
`1 I |
`
`
`
`Development
`Expenses
`
`Development
`Expenses
`
`1998
`
`1999
`
`2000
`
`2001
`
`2002
`
`2003 Cumulative
`Total
`
`EE
`
`‘4-
`,’
`
`oE 2
`
`‘
`‘+3
`‘:13Q
`0
`
`A second major concern related to the issue of the putative nexus
`
`between the revenues earned by the company and the patented invention.
`
`In this case, a competitor had entered the market one year after the
`
`patent holder with a product—acknowledged to be noninfringing and
`
`apparently not protected by any other patent or critical trade secret—that
`provided virtually the same benefits to the consumer as the disputed
`
`product, including such characteristics as ease of preparation, portion
`
`control, and shape of the package (important for product placement on
`the store shelf). Moreover, as shown in Figure 2, this product experienced
`
`a path of revenue growth almost identical to the product at issue. The
`
`patent holder claimed that the product embodying the patented invention
`
`was one way to achieve the benefits cited by customers. However, despite
`
`the dramatic growth in revenues, in our opinion the performance of this
`
`alternative product demonstrated that causation had not been established.
`
`Based on information we reviewed, it appeared that rapid growth in rev—
`
`enues and market share for products of this type were not dependent on
`
`the patented invention. Finally, we pointed out that the patent holder had
`
`a very well-known brand name and had used innovative techniques to
`introduce and market the product at issue. These factors further weak~
`
`ened the link between the patented invention and any success (at least in
`
`terms of gross revenues) that the product had in the m